Is This a New Frontier?

With shares of Frontier Communications Corporation (NYSE:FTR) trading at around $4.29, is FTR an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Frontier Communications has been losing customers. In Q1 of 2011, Frontier had 3,338,306 residential customers. In Q1 of 2013, it had 2,859,229 residential customers. In Q1 of 2011, it had 333,396 business customers. In Q1 of 2013, it had 281,052 business customers.

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In addition to the loss of customers, there are other negatives as well:

  • Increased competition
  • High expenses (mostly due to promotions)
  • Access line losses
  • Atrocious stock performance over the past two years (in a bull market)
  • 23.40 percent short position on the stock (a lot of non-believers)
  • Poor debt management
  • Decline in revenue in 2012
  • Decline in earnings four consecutive years
  • Verizon assets
  • Poor company culture

It’s amazing how often company culture matches the success (or lack of success) of a company. In other words, company culture is important. According to Glassdoor.com, Frontier Communications has a 2.3 of 5 rating, which is subpar. Only 28 percent of employees would recommend the company to a friend, and only 25 percent of employees approve of CEO Maggie Wilderotter.

There are a few positives for Frontier Communications, which include an increase in ARPC and the divestments of non-core assets. It should also be noted that there is a 9.40 percent yield on the stock. This makes the stock appealing to investors; they’re certainly not interested because of growth potential.

Jeffries recently cut its price target to $5 from $6, but rated it a Buy.

The chart below compares fundamentals for Frontier Communications, AT&T (NYSE:T), and CenturyLink (NYSE:CTL).

FTR T CTL
Trailing P/E 28.60 28.79 26.78
Forward P/E 19.50 13.79 13.62
Profit Margin 3.19% 5.81% 4.79%
ROE 4.10% 7.92% 4.43%
Operating Cash Flow 1.53B 39.53B 5.88B
Dividend Yield 9.40% 4.80% 5.70%
Short Position 23.40% 1.30% 7.30%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Frontier Communications has been a dog over the past two years, but the past year has been good.

At $4.29, Frontier is trading above its 50-day SMA and below its 200-day SMA.

1 Month Year-To-Date 1 Year 3 Year
FTR 1.42% 2.50% 35.78% -27.41%
T -3.52% 13.21% 16.37% 70.86%
CTL 1.37% -2.07% 2.37% 37.21%
50-Day SMA 4.07
200-Day SMA 4.31

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Frontier Communications is weaker than the industry average of 0.80. This isn’t much of an issue now, but when interest rates increase (eventually), it will become a factor. It’s possible for Frontier Communications to improve its debt management by that time, but not likely.

Debt-To-Equity Cash Long-Term Debt
FTR 2.07 875.91M 8.43B
T 0.85 3.88B 74.92B
CTL 1.10 476.00M 20.79B

E = Earnings Have Weakened

Earnings have consistently weakened on an annual basis. Revenue had been improving, but there was a setback in 2012.

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When we look at the last quarter on a year-over-year basis, revenue declined and earnings improved. Revenue also declined on a sequential basis. Clearly,it is becoming a concern.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in billions 2.24 2.12 3.80 5.24 5.01
Diluted EPS ($) 0.57 0.38 0.23 0.15 0.13
Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in billions 1.27 1.26 1.25 1.23 1.21
Diluted EPS ($) 0.03 0.02 0.07 0.0250 0.05

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

The industry is seeing decreased demand and increased competition. This is not a recipe for success.

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Conclusion

Frontier Communications is losing customers, and it’s in a weakening industry. The high yield is the most appealing attribute for the stock, but debt management is a concern and the dividend might be cut in the future. The stock has performed well over the past year, but almost any stock has the potential to perform well in a dartboard market. Therefore, there is near-term upside potential. However, if and when the market begins to act normally, this isn’t a good place to be. There are too many risks.

Frontier Communications is a STAY AWAY.

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All content posted should never be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.